1. Slide
9-1
Chapter
PLANT AND INTANGIBLE
9 ASSETS
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

2. Slide
9-2
Plant Assets
Long-lived assets acquired for use in
business operations.
Similar to long-term prepaid expenses
As years pass, and the
The cost of plant assets services are used, the
is the advance purchase cost is transferred to
of services. depreciation expense.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

3. Slide
9-3
Major Categories of Plant Assets
T a n g ib le P la n t In ta n g ib le N a tu ra l
A s s e ts A s s e ts R e s o u rc e s
L o n g -te rm N o n c u rre n t a s s e ts S it e s a c q u ir e d fo r
a s s e t s h a v in g w it h n o p h y s ic a l e x t r a c t in g v a lu a b le
p h y s ic a l s u b s t a n c e . s u b s ta n c e . re s o u rc e s .
L a n d , b u ild in g s , P a t e n t s , c o p y r ig h t s , O il r e s e r v e s ,
e q u ip m e n t , tra d e m a rk s , t im b e r , o t h e r
fu r n it u r e , fix t u r e s . fr a n c h is e s , g o o d w ill. m in e r a ls .
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

4. Slide
9-4
Accountable Events
–Acquisition.
—Allocation of the
acquisition cost to
expense over the
asset’s useful life
(depreciation).
˜Sale or disposal.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

5. Slide
9-5
Acquisition of Plant Assets
Asset
price
Cost +
Reasonable and
necessary costs . . .
. . . for getting . . . for getting
the asset to the the asset ready
desired location. for use.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

6. Slide
9-6
Determining Cost
On May 4, Heat Co., an Ohio maker of stoves,
buys a new machine from a Texas company.
The new machine has a price of $52,000.
Sales tax was computed at 8%.
Heat Co. pays $500 shipping cost to get the
machine to Ohio. After the machine arrives,
set-up costs of $1,300 are incurred, along with
$4,000 in testing costs.
Compute the cost of Heat Co.’s new machine.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

7. Slide
9-7
Determining Cost
Prepare the journal entry.
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8. Slide
9-8
Special Considerations
Cost includes real estate
commissions, escrow
Land fees, legal fees, clearing
and grading the property.
Improvements to land
Land such as driveways,
Improvements fences, and landscaping
are recorded separately.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

9. Slide
9-9
Special Considerations
Repairs made prior to the
building being put in use
Buildings are considered part of the
building’s cost.
Related interest,
insurance, and property
Equipment taxes are treated as
expenses of the current
period.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

10. Slide
9-10
Special Considerations
Allocation of a Lump-Sum Purchase
The total cost The allocation
must be is based on
allocated to the relative
I think I’ll buy the separate Fair Market
whole thing; barn, accounts for Value of each
land, and animals. each asset. asset
purchased.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

11. Slide
9-11
Capital Expenditures and Revenue
Expenditures
Capital Revenue
Expenditure Expenditure
Any material expenditure Expenditure for
that will benefit several ordinary repairs
accounting periods. and maintenance.
To capitalize an expenditure To expense an expenditure
means to charge it to an means to charge it to an
asset account. expense account.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

12. Slide
9-12
Depreciation
The allocation of the cost of a plant asset to expense in the
periods in which services are received from the asset.
Balance Sheet
Cost of Assets:
plant Plant and
assets equipment
as the services
Income Statement
are received
Revenues:
Expenses:
Depreciation
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

13. Slide
9-13
Depreciation
Book Value
 Cost – Accumulated Depreciation
Accumulated Depreciation
 Contra-asset
 Represents the portion of an
asset’s cost that has already
been allocated to expense.
Causes of Depreciation
 Physical deterioration
 Obsolescence
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

14. Slide
9-14
Straight-Line Depreciation
Depreciation Cost - Residual Value
=
Expense per Year Years of Useful Life
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

15. Slide
9-15
Straight-Line Depreciation
On January 1, 2003, Bass Co. buys a new boat. Bass
Co. pays $24,000 for the boat. The boat has an
estimated residual value of $3,000 and an estimated
useful life of 5 years.
Compute depreciation for 2003 using the
straight-line method.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

16. Slide
9-16
Straight-Line Depreciation
Bass Co. will record $4,200 depreciation each year for
five years. Total depreciation over the estimated useful
life of the boat is:
Salvage Value
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

17. Slide
9-17
Depreciation for Fractional Periods
When an asset is acquired during the year,
depreciation in the year of acquisition must be
prorated.
Half-Year Convention
½
In the year of
acquisition, record six
months of
depreciation.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

18. Slide
9-18
Half-Year Convention
Using the half-year convention, calculate the
straight-line depreciation on December 31,
2001, for equipment purchased in 2003. The
equipment cost $75,000, has a useful life of 10
years and an estimated salvage value of
$5,000.
Depreciation = ($75,000 - $5,000) ÷ 10
= $7,000 for a full year
1
Depreciation = $7,000 × /2 = $3,500
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

19. Slide
9-19
Declining-Balance Method
Depreciation in the early years of an asset’s estimated
useful life is higher than in later years.
The double-declining balance depreciation
rate is 200% of the straight-line
depreciation rate of 1/Useful Life.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

20. Slide
9-20
Declining-Balance Method
On January 1, 2003, Bass Co. buys a new boat. Bass
Co. pays $24,000 for the boat. The boat has an
estimated residual value of $3,000 and an estimated
useful life of 5 years.
Compute depreciation for 2003 using the
double-declining balance method.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

21. Slide
9-21
Declining-Balance Method
Compute depreciation for the restlife of an
Total depreciation over the estimated useful of the
asset is the same using either the straight-line method or
boat’s estimated useful life.
the declining-balance method.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

22. Slide
9-22
Financial Statement Disclosures
Estimates of Useful Life and
Residual Value
 May differ from company to
company.
 The reasonableness of
management’s estimates is
evaluated by external auditors.
Principle of Consistency
 Companies should avoid switching
depreciation methods from period to
period.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

23. Slide
9-23
Revising Depreciation Rates
Predicted Predicted
salvage value useful life
So depreciation
is an estimate.
Over the life of an asset, new information
may come to light that indicates the
original estimates need to be revised.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

24. Slide
9-24
Revising Depreciation Rates
On January 1, 2003, equipment was
purchased that cost $30,000, has a useful
life of 10 years and no salvage value.
During 2006, the useful life was revised to 8
years total (5 years remaining).
Calculate depreciation expense for the year
ended December 31, 2006, using the
straight-line method.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

25. Slide
9-25
Revising Depreciation Rates
When our estimates change,
depreciation is:
Book value at Salvage value at
date of change – date of change
Remaining useful life at date of change
Asset cost $ 30,000
Accumulated depreciation, 12/31/2005
($3,000 per year × 3 years) 9,000
Remaining book value $ 21,000
Divide by remaining life ÷5
Revised annual depreciation $ 4,200
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

26. Slide
9-26
Impairment of Assets
If the cost of an asset
cannot be recovered
through future use or
sale, the asset should
be written down to its
net realizable value.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

27. Slide
9-27
Disposal of Plant and Equipment
Update depreciation
to the date of disposal.
Journalize disposal by:
Recording cash Recording a
received (debit) gain (credit)
or paid (credit). or loss (debit).
Removing accumulated Removing the
depreciation (debit). asset cost (credit).
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

28. Slide
9-28
Disposal of Plant and Equipment
If Cash > BV, record a gain (credit).
If Cash < BV, record a loss (debit).
If Cash = BV, no gain or loss.
Recording cash Recording a
received (debit) gain (credit)
or paid (credit). or loss (debit).
Removing accumulated Removing the
depreciation (debit). asset cost (credit).
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

29. Slide
9-29
Disposal of Plant and Equipment
On September 30, 2003, Evans Map Company
sells a machine that originally cost $100,000 for
$60,000 cash. The machine was placed in
service on January 1, 1998. It has been
depreciated using the straight-line method with
an estimated salvage value of $20,000 and an
estimated useful life of 10 years.
Let’s answer the following questions.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

30. Slide
9-30
Disposal of Plant and Equipment
The amount of depreciation
recorded on September 30, 2003,
to bring depreciation up to date is:
a. $8,000. Annual Depreciation:
($100,000 - $20,000) ÷ 10 Yrs. = $8,000
b. $6,000.
c. $4,000. Depreciation to Sept. 30:
d. $2,000. 9/12 × $8,000 = $6,000
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

31. Slide
9-31
Disposal of Plant and Equipment
After updating the depreciation, the
machine’s book value on
September 30, 2003, is:
a. $54,000. Cost $ 100,000
Accumulated Depreciation:
b. $46,000. (5 yrs. × $8,000) + $6,000 = 46,000
c. $40,000. Book Value $ 54,000
d. $60,000.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

32. Slide
9-32
Disposal of Plant and Equipment
The machine’s sale resulted in:
a. a gain of $6,000.
b. a gain of $4,000.
c. a loss of $6,000.
d. a loss of $4,000. Cost $ 100,000
Accum. Depr. 46,000
Book value $ 54,000
Cash received 60,000
Gain $ 6,000
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

33. Slide
9-33
Trading in Used Assets
for New Ones
Accounting depends on whether
assets are similar or dissimilar.
Airplane Truck
for for
Airplane Airplane
Only situations where cash
is paid will be demonstrated.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

34. Slide
9-34
Trading in Used Assets
for New Ones
Dissimilar Similar Assets
Assets and Cash Paid
Recognize
Yes No
Gains?
Recognize
Yes Yes
Losses?
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

35. Slide
9-35
Trading in Used Assets
for New Ones – Similar Assets
On May 30, 2003, Essex Company
exchanged a used airplane and $35,000
cash for a new airplane. The old airplane
originally cost $40,000, had up-to-date
accumulated depreciation of $30,000, and
a fair value of $4,000.
SIMILAR
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36. Slide
9-36
Trading in Used Assets
for New Ones – Similar Assets
The exchange resulted in a:
Cost $ 40,000
a. gain of $6,000. Accum. Depr. 30,000
Book Value $ 10,000
b. loss of $6,000. Fair Value 4,000
c. loss of $4,000. Loss $ 6,000
d. gain of $4,000.
Prepare a journal entry
to record the exchange.
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37. Slide
9-37
Trading in Used Assets
for New Ones – Similar Assets
Prepare the journal entry to record
the trade.
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38. Slide
9-38
Intangible Assets
Noncurrent assets Often provide
without physical exclusive rights
substance. or privileges.
Characteristics
Useful life is Usually acquired
often difficult for operational
to determine. use.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

39. Slide
9-39
Intangible Assets
Record at
current cash  Patents
equivalent cost,
including  Copyrights
purchase price,  Leaseholds
legal fees, and  Leasehold
filing fees. Improvements
 Goodwill
 Trademarks and
Trade Names
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40. Slide
9-40
Intangible Assets
Amortize over shorter of economic
life or legal life, subject to a maximum
of 40 years.
Use straight-line method.
Research and development costs are
normally expensed as incurred.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

41. Slide
9-41
Intangible Assets – Goodwill
Goodwill
Occurs when one Only purchased
company buys goodwill is an
another company. intangible asset.
The amount by which the
purchase price exceeds the fair
market value of net assets acquired.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

42. Slide
9-42
Intangible Assets – Goodwill
Eddy Company paid $1,000,000 to
purchase all of James Company’s assets
and assumed liabilities of $200,000. The
acquired assets were appraised at a fair
value of $900,000.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

43. Slide
9-43
Intangible Assets – Goodwill
Intangible Assets – Goodwill
What amount of goodwill should be
recorded on Eddy Company books?
a. $100,000.
b. $200,000.
c. $300,000.
d. $400,000.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

44. Slide
9-44
Intangible Assets – Patents
Exclusive right granted
by federal government to sell or
manufacture an invention.
Cost is purchase Amortize cost
price plus legal over the shorter of
cost to defend. useful life or 17 years.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

45. Slide
Intangible Assets –
9-45
Trademarks and Trade Names
A symbol, design, or logo
associated with a business.
Purchased
Internally trademarks
developed are recorded
trademarks at cost, and
have no amortized over
recorded shorter of legal
asset cost. or economic life,
or 40 years.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

46. Slide
9-46
Intangible Assets – Franchises
Legally protected right to sell products
or provide services purchased by
franchisee from franchisor.
Purchase price is intangible asset
which is amortized over the shorter of
the protected right or 40 years.
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47. Slide
9-47
Intangible Assets – Copyrights
Exclusive right granted by the
federal government to protect
artistic or intellectual properties.
Legal life is Amortize cost
life of creator over a period not
plus 50 years. to exceed 40 years.
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48. Slide
9-48
Natural Resources
Total cost,
Extracted from
including
the natural
exploration and
environment
development,
and reported
is charged to
at cost less
depletion expense
accumulated
over periods
depletion.
benefited.
Examples: oil, coal, gold
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49. Slide
9-49
Depletion of Natural Resources
Depletion is calculated using the
units-of-production method.
Unit depletion rate is calculated as follows:
Cost – Salvage Value
Total Units of Capacity
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

50. Slide
9-50
Depletion of Natural Resources
Total depletion cost for a period is:
Unit Depletion Number of Units
Rate × Extracted in Period
Cost of
Total goods sold
Inventory
depletion
for sale
cost Unsold
Inventory
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

51. Slide
9-51
Depletion of Natural Resources
Specialized plant assets may be required
to extract the natural resource.
These assets are recorded in a separate
account and depreciated.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

52. Slide
9-52
The Units-of-Output Method
Cost per Unit Cost - Residual Value
=
of Output Estimated Units of Output
Depreciation Cost per Unit Number of
Expense
= ×
of Output Units Produced
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

53. Slide
9-53
MACRS: The “Tax Method”
MACRS = Modified Accelerated Cost Recovery System
The only accelerated method
Based on
allowed by the IRS when
Declining-Balance
computing depreciation for tax
Methods
return purposes.
Asset Cost × MACRS rate
Rates are available from tables
provided by the IRS.
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

54. Slide
9-54
Which Depreciation Methods
Do Most Businesses Use?
A survey of 600 Publicly Owned Corporations
Straight-line 563
Declining-balance 44
Sum-of-the-years'-digits 11
Accelerated methods (not specified) 70
Units-of-output 53
Other 9
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002

55. Slide
9-55
End of Chapter 9
McGraw-Hill/Irwin © The McGraw-Hill Companies, Inc., 2002